Third-quarter economic growth bests expectations

The U.S. economy accelerated between July through September, growing at an annualized rate of 2 percent, the government said Friday in a report that slightly exceeded expectations.

After growing at just 1.3 percent in the second quarter, the U.S. economy sped up in the subsequent three months, beating analyst expectations of a 1.8 percent third-quarter growth rate.

The quarterly growth was powered by a boost in consumer spending, but was restrained by tame business investment. This reflects polls of sentiment, which show a more upbeat consumer, and businesses holding a less positive view of the future.

The drop in a range of business spending suggests that the unresolved so-called “fiscal cliff” -- the planned tax hikes and deep spending cuts if Congress can’t reach compromise later this year -- already is harming the economy.

Coming back from the worst recession since the Great Depression, the U.S. economy continues to underperform. While an improvement, the rate of growth in gross domestic product, the broadest measure of U.S. trade in goods and services, is nowhere near what’s needed to knock down the 7.8 percent unemployment rate.

“The economic recovery continues but at a very sluggish pace. Over the first 13 quarters of the recovery, real GDP growth has averaged only 2.2 percent and, at 2.3 percent, the pace of growth over the last year has shown no signs of picking up,” wrote economists at RDQ Economics, a research note.

The increase in the growth rate is a preliminary first estimate that will be updated Nov. 29 as more information comes in. The growth rate, said the U.S. Bureau of Economic Analysis, reflected positive contributions from personal consumption, federal government spending and residential fixed investment.

These positives in the economy were partially offset by negative contributions from exports, which declined amid a global growth slowdown, and by businesses pulling back on investment in their private inventories. That suggests businesses and corporations are holding back amid election uncertainty and still unresolved major issues such as whether tax cuts that were extended this year are allowed to expire.

“The corporate sector is cautious. Equipment and software spending was flat in (the third quarter), after expanding at a 5.1 percent rate in the first half. This was the weakest quarter we’ve seen since the recovery started in mid-2009,” wrote Neil Dutta, head of economics at Renaissance Macro Research, in a note to investors. “Capital spending responds to an accelerator effect; thus, with expectations around future growth receding, the corporate sector is holding back. With the year-end fiscal cliff approaching, firms are holding back on committing to longer-lived durable assets.”

The “fiscal cliff” involves Bush-era tax cuts that are set to expire at the end of this year, reverting back to Clinton-era tax brackets. Also expiring is a tax holiday on what employees contribute in payroll taxes.

Absent a budget deal, deep mandatory cuts in spending across government, including defense and national security, are set to take hold next year. And by late February or March, the government is expected to bump up against a debt ceiling and will have to reach a new accord with Congress in order to borrow more to pay existing obligations. All these things fall under the “fiscal cliff.”

“The economy simply does not have enough momentum to absorb the shock from going over the fiscal cliff without going into recession in 2013,” wrote Dutta.

There’s plenty of anecdotal evidence that businesses are pulling back until there is greater clarity. Should a compromise not be reached, the implications for the economy are grave. Analysts expect the final months of this year to be much like the sluggish growth of summertime.

“We see little prospect for improvement in the current quarter, with the major components likely to maintain (third-quarter) trends,” wrote Alan Levenson, chief economist with investment giant T. Rowe Price, in a research note.

There were some signs of life in Friday’s numbers. Personal consumption rose by 2 percent, driven in large measure by a return of the consumer. Spending on goods rose at a rate of 4.4 percent in the quarter, and spending on services rose at a slower rate of 0.8 percent in the three months. Spending on durable goods, big ticket items such as cars and refrigerators, rose by 8.5 in the quarter.

For the first time in quite a while, housing added to growth rather than subtracted from it. Investment in residential housing leapt up at a rate of 14.4 percent in the three-month period, rising from an 8.5 percent rate in the second quarter of this year. That’s a plus for growth, but housing today represents a smaller share of overall growth so its impact on the broader growth numbers is subdued.

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